What's love got to do with CGT?

With capital gains tax (CGT) changes looming in April, Valentine's Day could well prompt many couples to transfer assets as well as love and affection.

But they need to be married or in a civil partnership if they are to maximise their CGT exemption before the indexation allowance and taper relief are scrapped at the end of this tax year.

Capital gains tax is levied on the profits of selling investment such as shares, second homes or buy-to-let properties and other assets. The current exemption or tax-free level (to be increased in the forthcoming Budget) is £9,200 for every individual.

CGT is not paid on your main home (although certain conditions apply), car, ISAs or PEPs, UK Government bonds, gambling gains or personal belongings worth £6,000 or less. Assets can be transferred, without liability to CGT, between spouses and partners who are married or in a civil partnership. Transferring assets before 6 April will allow the retention of any existing indexation or taper relief benefits.

You dont have to like tax but you do have to pay it. But are you paying too much?

How has this come about?

In the new tax year, CGT will no longer be payable at an individual's highest rate of tax. Last October in his Pre-Budget Report, Chancellor Darling proposed a reduction in the CGT top rate of 40% down to a flat rate of 18%.

Good news, it would seem. Alas, bad news lurked in the small print (as usual!) At the same time the Chancellor announced plans to abolish two valuable tax reliefs which hitherto have had the potential to reduce any CGT bill. The first is the indexation allowance which reduces an investor's gain by the annual rate of inflation for the years from 1982 through to 1998.

The second is, since 1998, taper relief which reduces the percentage of gain that is taxable, depending on the type of investment and the length of time it is held.

In essence, for what are termed non-business assets held by private investors, eg shares, funds and property, taper relief progressively reduces a higher rate taxpayer's effective tax rate from 40% to 24% over 10 years; for basic rate taxpayers the fall is from 20% to 12%.

For business assets, such as companies built up by individual entrepreneurs and shares held by employees in their own company (save as you earn schemes) the effective CGT rate is reduced by taper relief after two years to 10% for higher rate and 5% for basic rate taxpayers.

Check out Moneyextra's tax tables!

Long termers could lose out

A CGT flat rate of 18% will obviously be welcomed by recent richer share owners who would otherwise have fallen into the 40% tax bracket; ditto for those who have moved into buy-to-let or have bought a second home for investment purposes.

However, long term investors with assets dating back more than 10 years could well lose out in April's rate change because existing taper relief and indexation allowance has meant their effective CGT rate is less than 18%.

14 February 2008 © Moneyextra.com

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